A personal loan for business is a way a borrower can acquire the financing they need for their business in the event they don’t have enough revenue or time in business to qualify for a traditional small business loan. Personal loans for business can be especially useful for newer businesses without an established track record and often have lower interest rates than business loans.
A personal loan can be money borrowed from a bank, credit union, or online lender with terms that dictate that the funds can be used for business purposes. These types of loans are usually term loans, meaning you pay them back in fixed, monthly installments with interest over the length of your repayment period (often two to seven years).
It’s important to note that not all personal loans are allowed to be used for business purposes. Therefore, if you’re looking to take out a personal loan for business, you’ll want to be sure your lender will allow you to apply the funds toward your business.
If so, you can use your personal loan for a variety of business purposes, including purchasing inventory, meeting payroll, or buying ads.
Easier to qualify for: With a personal loan for business, the lender considers your personal financial background rather than your business’s. Therefore, if you have a good credit score and some income, you’ll likely have an easier time securing a personal loan for your business than you would a traditional business loan. For this reason, personal loans for business are often particularly appealing for startup funding.
Collateral not required: Many personal loans for business are unsecured—meaning you don’t need to offer up collateral with your loan agreement. Most business loans, on the other hand, are secured by some form of collateral, whether physical assets, a personal guarantee, or a UCC lien.
Lower APRs and longer terms: Because your personal financial history is stronger or more established than your business’s financial history, a personal loan for business will likely grant you more favorable terms than a traditional business loan.
Typically, you’ll see interest rates that start as low as 5.99%. You’ll also receive a fixed payment schedule with monthly repayments (as opposed to daily or weekly) and longer repayment terms.
Flexibility: Although certain types of business loans can only be applied toward certain expenses, a personal loan for business usually offers you quite a bit of flexibility in terms of what you can spend the money on.
Risking personal assets: To qualify for a personal loan for business, you may have to put up your own assets as collateral. If you default on the loan, those assets could be seized. Additionally, because the loan is a personal loan, your payment history will be reported to the consumer credit bureaus—meaning any late payments or default will impact your personal credit score.
Can’t build business credit: Because the loan isn’t tied to your business, a personal loan for business can’t help you build your business credit score—this could then further limit your ability to secure a business loan in the future.
Small loan amounts: A personal loan is typically smaller than a business loan, meaning you may not be able to receive all the funds you need to cover expenses.
Mixing personal and business finances: If you use a personal loan for business, you risk mixing your personal and business finances, which can cause a lot of headaches come tax season. To avoid this potential issue, consider opening a separate business bank account and enlisting the help of a bookkeeper.
Here are some scenarios in which it may make sense to take out a personal loan for business rather than a dedicated business loan:
On the other hand, of course, there are also scenarios in which a dedicated business loan will be a better solution for your financial needs:
Ultimately, personal loans for business are granted to borrowers with a strong personal credit history and a steady amount of income.
Generally, lenders will look at factors like your personal credit score, debt-to-income ratio, gross annual income, and net worth to determine whether or not you qualify for a loan—and if you qualify, what interest rate you’ll receive.
Although you can go directly to a lender to see if you qualify and apply for a personal loan for your business, you might also opt to use a marketplace like Fundera, in which you input your personal information and see a range of options that may suit your needs.
The application process for a personal loan for business will depend on the type of lender you’re working with—just like with any business loan application.
Banks and credit unions typically have a longer application process and may require you to apply in person, or at least over the phone.
Online lenders tend to have more streamlined and efficient application processes—only requiring a handful of documents in the actual application.
Documents and information you may need:
If a personal loan for business doesn’t make sense for you, here are some alternatives to consider.
A business term loan is a lump sum of funds that you pay back over a set term, with interest. Business term loans can be used for a number of business expenses and vary greatly in amount, terms, and rates depending on the lender.
A business line of credit is similar to a credit card: It gives you access to a pool of funds to draw from when you need capital. You only have to repay and only pay interest on what you use. Business lines of credit typically come with higher loan amounts than personal loans for business, and they can also be used for a wide variety of business purposes.
Another common option is to finance your business with a business credit card, particularly one with a 0% intro APR period. This means you’ll essentially have a credit card that acts as an interest-free loan—letting you pay down debt, interest-free, on purchases during the introductory period.
Note that once your 0% intro APR period expires, your interest rate will set in at a rate that will depend on your creditworthiness and the market prime rate.
To qualify for a business credit card, you’ll need a strong personal credit score. Business credit cards typically don’t come with high credit limits, but they can be a great way to begin funding your business interest-free (especially as a startup) while earning rewards for spending.